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| A moat surrounds a medieval castle to protect from attackers |
In modern business parlance, a moat is something that protects a business from competition or gives it an advantage. A moat could be a trade secret, patented product or process, or an asset that represents a significant capital investment. A moat could be a partnership, an exclusive license, a government granted limited-monopoly, or any barrier to a resource or market. The term was popularized by Warren Buffet. He covers moats in his book
Buffett Beyond Value and says that he doesn't invest in businesses unless they have one or more moats; otherwise, it's a quick race to the bottom.
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In business, I look for economic castles protected by unbreachable moats." ~Warren Buffett
This story is about Tesla's moats, but I don't mean to imply that Buffett would invest in Tesla. Tesla is far from the value investments of the Berkshire Hathaway portfolio. Rather, Buffett's comments are to demonstrate the importance of moats. Morningstar even has a guide called
Why Moats Matter. Understanding the moats a business employs is clearly important to understanding the business and its future.
In no particular order, here's a list of Tesla's moats: mall stores, direct sales, Supercharger network, brand loyalty, EV mindshare, mission-driven, Tesla Energy, Panasonic partnership, rockstar status CEO, electric motor technology & manufacturing, battery technology & manufacturing, software development, connected cars, AI, talent magnet, fleet learning, SpaceX, vertical integration, over-the-air updates, mobile ranger service, Gigafactory, investor expectations, first mover advantage.
These moats enable Tesla to do things that other automakers cannot even consider. Some of these moats are wider than others. Let's group them and look at them in more detail. If you know of any Tesla moats missing from the list, let me know below.
Stores & Direct Sales
When you buy a Tesla product, you buy it from, well, Tesla. This might seem like a silly statement, but that is not how most car companies operate. Traditional automakers have dealerships. Dealerships are not owned by the manufacturer, they locally owned businesses. In most states, the automakers are legally forbidden from owning a dealership. Dealerships are middlemen. This means that when you pay for a car, you must pay a price that allows both the manufacturer and the dealership to make a profit on the sale.
Tesla has stores in shopping malls. This allows you see their cars in a familiar and comfortable place. The Tesla employees in the store are not commissioned salespeople. They are there to answer questions, not to "get you into a deal today". There is no haggling, the cars have a Hobson's Choice price; Take it, or leave it. You pay the same price that Elon Musk's mom would pay, the same price that any Tesla board member would pay. This matches well with the online shopping model that Gen Y and younger are accustom to.
* Moats: Mall Stores, Direct Sales
Connected Cars & Over-the-Air Updates
All of Tesla's cars have wireless service. The original cars had 3G, today they have 4G LTE, and when 5G is the standard they'll come equipped with that (or maybe something better). This connectivity allows the navigation system to have up-to-date maps and real-time traffic. Every smartphone has had this feature for over a decade, but in cars, this is still a rarity. In other cars, maps could be years out date and/or cost hundreds of dollars to update.
The maps and traffic data is nice, but the real advantage of a connected car is software updates. Tesla is constantly improving their software (more on software later) and when they have a new version, you click a couple buttons on the screen, and your car is updated to the latest and greatest. This keeps the ownership experience exciting. You can recapture a bit of the new car smell when a new feature or easter egg is added.
* Moats: Connected Cars, OTA Updates, Refreshed SW keeps cars relevant
No Dealerships
A dealership's agenda, might not be the same as the manufacturer's and it is not likely the same as yours.
We just discussed over-the-air updates. These are an example where the dealership might have a different interest than you or the manufacturer. Over-the-air updates are convenient for owners, you just wake up to a vehicle with updated software. Well, dealerships in many states can prevent a manufacturer from implementing this feature in their cars. Why? Because that is considered "servicing the vehicle" and the dealership agreement guarantees that all manufacturer service is contracted to the dealership. The dealerships want you to bring your car in often so they have a chance to upsell you on service or to a newer car. If a manufacturer pushes updates over-the-air, they might find themselves in a lawsuit or two with the dealership associations as Tesla has been, albeit for different reasons.
Dealerships make most of their money from service. Anything that prevents a car from coming into the shop is a missed opportunity for them to profit from the customer. Electric vehicles already require far less maintenance than gas cars, allow wireless software updates too and there is even less of a reason for the car to visit the dealership on a regular basis.
With Tesla owning their own stores and service centers, Tesla is able to set their own direction without a complex web of multi-state dealership agreements. This gives them flexibility and allows them to define the ownership experience for their vehicles.
* Moat: Ownership of customer experience, No margin sharing
Panasonic Partnership
Tesla and Panasonic are partners in battery and solar technology and manufacturing.
Panasonic announced it would invest more than $1.6B into the Tesla Gigafactory 1 battery plant. Gigafactory 1 supplies the battery cells for Tesla Models 3, Powerwall, and Powerpack products. Panasonic directly manufacturers the 18650 cells that are used in the Model S and X.
Panasonic is also a partner in Gigafactory 2 for solar roof production.
Tesla currently has a hot brand and they are shipping a lot of Panasonic technologies. Panasonic certainly is looking at Tesla as a growth area for their products. Many other automakers are using LG Chem batteries. This means that Panasonic has a vested interest in seeing Tesla survive and grow. This could mean that Panasonic would be willing to invest more into Tesla if cash infusions are needed as Tesla hits bumps in the road getting to mass market production.
* Moats: Strong technology and financial partnership with a behemoth
EV Mindshare
It seems like nearly all headline about an electric car (any electric car) mentions Tesla. The car being reviewed is either a "Tesla Killer" or "How Does Car
X Compare To The Tesla ..." This was true for the new Leaf, the Jaguar iPace, the Porsche Mission E, and nearly any other new EV coming to market.
This is no different than hybrids and the Toyota Prius. Any new hybrid that comes out is compared to the Prius, because Prius is the benchmark of hybrids. Similarly, Tesla is the benchmark for electric cars. Over the next decade, many automakers will make EVs and they will all be compared to Tesla (range, price, styling, performance...).
As more automakers bring EVs to market, they will be playing the game on Tesla's court.
* Moats: First Mover Advantage, home
field advantage, defacto standard
Mission-Driven, Brand, & Rabid Fans
Tesla has a fanbase that other car companies dream about. They have Apple-like devotion with people lining up to buy their first affordable mass production vehicle. Why does Tesla have such devoted fans? There are as many reasons and every fan has their own reasons. However, I'll suggest one important reason: Tesla is mission-driven. They are an uncompromised
pure-play.
Tesla is not reluctantly making EVs just to meet a state mandate. They didn't recall and crush EVs from the late 90s. They don't have a 100-year history of making gas burning cars that have put thousands of pounds of CO2 into our atmosphere. They haven't participated in a conspiracy to
shut down public transportation. They were not caught cheating on emissions tests.
Tesla makes exciting cars that are fun to drive!
They make solar panels that can charge the car with energy from the giant fusion reactor in the sky known as the Sun. They make storage batteries so the stored solar energy can power your house after the sun goes down.
People are inspired by Tesla. Their many many fans of Tesla give them free advertising. They make fan ads, they write blogs, there are dozens of Tesla podcasts and
YouTube channels. Tesla held a competition for the best fan ad and there were hundreds of submissions. One couple loves Tesla so much, they had a
Tesla themed wedding. Few brands have such devotion.
* Moats: Devoted fan base, dedicated brand, free from historic stains, free fan-based marketing
SpaceX
SpaceX is not part of Tesla, but Elon Musk is at the helm of both companies and they have more cross-over than it may seem. Their direct cross-overs include aluminum fabrication and AutoPilot. There are some less direct connections too.
When they run into a tough engineering problem at Tesla, they can literally call rocket scientists. “That’s cross-fertilization of knowledge from the rocket and space industry to auto back and forth, as I think it’s really been quite valuable,” Musk said on a Tesla earnings call.
Aluminum Fabrication: When you are making rockets, you want them light and strong. Seems are generally weak points. SpaceX uses a specific friction stir welding that fuses the metal together without melting it. The end result is stronger and lighter than a traditional aluminum weld, with just 10% waste metal.
AutoPilot: SpaceX's rockets have to operate autonomously for much of their flights, including landing on drone ships at sea. This is very different than navigating city streets, but both of them need to interpret the data from the sensors. Raw data from radar and sonar is very noisy and false positives are common. Decoding these signals is tricky and vitally important. Sharing learnings here improves both systems.
Marketing: SpaceX launched a Tesla Roadster into space. This was a huge marketing success. Most aerospace companies would have just used a dummy load for this type of test launch. So for just the small cost of a used Roadster and a mannequin, Tesla and SpaceX had the most talked about launch in the last decade. According to Reuters, Apple and Google's corporate brands dropped in an annual survey while... Tesla's rocketed higher after sending a red Roadster into space.
Starlink: Starlink is a satellite broadband communication project by SpaceX. It is to provide low-cost, high-performance satellite-based internet connectivity. SpaceX has just launched the first of the low-earth orbit satellites and plans to put nearly 12,000 of them into orbit by the mid-2020s. The first obvious customer for this service is Tesla's cars. Today, Tesla has to pay for the LTE connection in each of their vehicles. After the Starlink is up and running, Tesla can use this network for all of their connected car activities. The service wouldn't be free to Tesla, but it would be one of Musk's companies paying another one of Musk's companies.
Mapping is an important part of autonomous car tech. There are no publicly announced plans, but it's possible that SpaceX satellites could help provide some of this information to Tesla.
* Moats: Access to SpaceX's advanced materials scientists. Access to cross promotions. Possible highly affordable connected car internet service.
Recruiting Talent
If you were fresh out of school and wanted a job at a car company, would you rather work at one of the legacy car companies or at Tesla? Tesla is an innovative Silicon Valley company that makes sexy fast cars. If you want to work in battery tech, AI, automation, or many other fields, Tesla is the place that is treading new ground.
In March of 2018, Tesla was on LinkedIn’s list of top companies that American professionals want to work for, placing 5th and outranking Apple and Disney. Tesla is listed along with tech companies, not automakers. They are (and they are perceived as) a tech company that makes cars, rather than just a car company.
Over 500,000 people applied for jobs at Tesla in 2017. With this many candidates, Tesla is able to hire the cream of the crop. To do things that have never been done before, you have to hire highly skilled people.
* Moat: Desirable employer.
Vertical Integration
Most car companies today are mostly assembly and branding companies. Other than the internal combustion engine, they do very little of the engineering. Instead, they rely on their suppliers. In many cases, even the car designs are outsourced. This means legacy automakers are buying parts and buying their innovations. Cars generally have 15% or less margin at wholesale. Whereas the component suppliers may have 50% margins.
Tesla certainly has suppliers too, but they manufacture far more of their car's components than other automakers. Tesla designs and manufactures their own electric motors and they have vastly improved upon the AC Propulsion motor they started with a decade ago. By controlling the manufacturing of their parts -- especially batteries -- from start to finish, Tesla could create a significant cost advantage.
* Moats: Vehicle design, vehicle engineering, product margin.
Software
Tesla's cars are often described as "computers on wheels". They are software controlled. This allows new features to be added, upgrades, improved user interfaces, voice control, and more. The big screen is central to the car and not a de minimis afterthought. Tesla has a large in-house software team to deliver these features that are vital to the driving and ownership experience of Tesla.
Other automakers contract their software to outside firms for various tasks. This means that the look and feel of the navigation, for example, might be very different than the entertainment system.
* Moats: Talented in-house software engineering (see recruiting talent above)
Fleet learning & AI
All of Tesla's cars have their full AutoPilot sensor suite of cameras, radar, and sonar. As we discussed above, Tesla's vehicles are connected cars. This means they can receive new software over-the-air. This allows Tesla can test their AutoPilot updates in shadow mode on hundreds of thousands of cars driving millions of miles before rolling it out to customers. Even cars that don't have enhanced AutoPilot or self-driving features enabled are helping to contribute to Tesla's validation efforts. Tesla has more than 300,000 cars on the road around the world gathering valuable feedback for their AI.
Compare this to the autonomous drive efforts of any other company. Other companies have a couple dozen cars with engineers or safety drivers behind the wheel. It takes a long time to get a million+ miles of validation. Then the software gets an update and the validation effort has to start all over.
* Moats: Massive fleet of fully instrumented cars
Supercharger Network
One of the drawbacks to EV driving is the difficulty of locating charging while on road trips. Tesla has solved this problem. In most regions where they sell the cars, there is a vast Supercharger network. You simply type the address in for your destination and the car will plot a route for you, showing you each stop that you'll need to make along the way. You can drive from Seattle to Miami or LA to Portland, Maine and there are Superchargers all along the route to recharge your car.
Today, there is no other plug-in car that can make such a claim. CHAdeMO and CCS charging stations are clumped in urban areas on the coasts with a large charging wasteland betwixt and between.
Additionally, Tesla's Supercharger network is reliable and easy to use. With other networks, you have to join and carry a card, fob, or app that you have to tap, scan, or activate. With Tesla's network, you just plug in. The protocol for determining who you are and what, if any, fees happens automatically when the car is connected.
Reliability and availability are vital to a charging network. If you show up at a location near empty, expecting to charge, only to find the charging station broken down or occupied, this can ruin your trip. Tesla Supercharger stations generally have 6 or more charging stations. Most have 10+ and some have as many as 50 charging spots. So if a station or two are down for repair, there are still plenty of spots where you can charge. If you're curious about a Tesla Supercharger location, you can click on it in the car and it will show you how many stations are there, how many are operational, and how many are occupied. Other networks generally only have 1 charging station per location. If it is not working, you're out of luck.
Other automakers are generally not investing in charging networks. They see themselves as automakers, not fuel suppliers. Since their business is not dependent on selling EVs, they are content to let this remain as someone else's problem.
Tesla, on the other hand, is growing a vast network of Superchargers around the globe where they will be able to sell energy at 2 to 3 times the local residential rate. Tesla has said that charging will not be a profit center for the company, but the revenue will certainly help to pay for expansions of the Supercharger network. Tesla has more than 1200 locations where you can fast charge with more location coming online every week.
* Moats: Building thousands of Supercharging locations is time and capital intensive. Network
ease of use & reliability. Revenue stream from 'fueling' vehicles.
Workplace & Destination Charging
While we're on the topic of charging, it is important to mention destination charging. There are hotels, bed & breakfasts, wineries, restaurants, ski lodges, malls, and other places that have Level 2 charging for Tesla vehicles. These are ofter a free amenity at these locations for patrons. These locations want well-heeled Tesla drivers visiting their establishment.
Tesla recently expanded this program and is now offering Level 2 chargers free to employers too.
Other car companies are far behind in providing charging support at this level.
* Moats: Vast network of workplace and destination charging stations
Gigafactory
Tesla has a giant battery factory in Nevada. By footprint, it is one of the largest buildings in the world. When it is in full operation, this one factory will make more batteries annually than all of the world's combined factories made in 2013. Tesla has plans for similar factories in Asia and Europe as well.
These factories require a massive outlay of capital. They require a commitment to battery-powered cars as the next generation of personal transportation. Other automakers are only tepidly dabbling in EVs. They are making low volumes "compliance" cars and some are still working on fuel-cells or
hail-marry internal combustion solutions.
* Moats: Biggest battery factory in the world, with more coming. Significant capital expenditure.
Investor Expectations
Why is it that Tesla can spend billions of dollars on battery factories and global Supercharger networks? Whereas, if other automaker CEOs hemorrhaged cash at this rate, they'd be fired faster than a Ludicrous Tesla. The simple answer is the expectation of the board of directors and the shareholders. People that invested in legacy automakers bought into a stable business that pays regular dividends.
Tesla investors, on the other hand, bought into a growth company. They are not looking for Tesla to be profitable today, or anytime soon. Tesla's investors are looking for top-line grow rather than bottom-line profits. Today, Tesla has about 20% of the luxury car market. If they can expand into affordable cars, semis, small crossovers, performance cars, pickup trucks, and who know what else with a similar market share, Tesla could be one of the most valuable companies in the world. And as we discussed above, due to direct sales and verticle integration, Tesla has the ability to sell cars with better profit margin than any other automaker. Or so goes the hope of people (like me) that are invested in Tesla.
Amazon is a good comparison. For years Amazon sunk their revenue back into their growth rather than paying out dividends to investors. In May 1997, Amazon went public at $18 per share. As I write this, the stock is nearly $1500 per share. And that's after 3 stock splits. Amazon investors were looking for growth, not profits and dividends. Today, Tesla investors have the same growth mentality. As market darlings, Tesla can raise capital by issuing shares, bonds, or taking loans. This allows them to pursue big efforts as long as they are delivering growth.
* Moats: Investor expectation of growth rather than quarterly profits
Rockstar CEO
Love him or hate him, Musk is by far the most widely known CEO of a car company since Henry Ford. This fame and fandom allows Musk to put out a message and have it echoed through his social media presence. When he tweets, it is news. The Boring Company has sold hats, flamethrowers, fire extinguishers, and now lifesize LEGO-like interlocking bricks made from tunneling rock. Fans have and will buy these because they are fans and want to signal their devotion to the Musk tribe.
This media attention can be a double-edged sword. When Tesla misses a deadline or a Tesla vehicle is in a crash, it gets as much media attention as Tesla's successes. But for a company, the only thing worse than too much media attention... is *no* media attention.
Musk's past accomplishments, circle of friends, and current status allows him to raise money. This is important until Tesla's vehicle production is at a volume that would allow them to be consistently profitable (about 1 year from now by our estimation).
* Moats: Media attention, Ability to raise capital
Dreadnaught
In addition to trying to reinvent personal transportation, auto sales methods, and home energy, Tesla is also trying to reinvent the way that cars are manufactured. This is "the machine that builds the machine".
In 2016, Tesla acquired German automation company, Grohmann Engineering. This was one step to reinvent the auto factory. Musk has said that their factory will look so radically different from traditional factories that it would seem like an alien dreadnaught. Staying true to Tesla's Silicon Valley root Musk said, "It might look like a giant chip pick-and-place machine...".
Musk has said that if you look at the rate that cars come off the end of the line in today's auto factories, that it's slower than "grandma with a walker". Musk would like his factory to move at least at a jogging pace. He wants the robots to be moving so fast that the air drag is a relevant factor.
Musk has even talked about selling their factory as a product.
Today, however, companies like GM, Ford, and Toyota are not impressed with the speed or quality of Tesla's manufacturing and have no intention of trading in their factories for a Tesla Dreadnaught.
The results of the current version 0.5 Dreadnaught are not Earth-shattering, but that does not mean that it won't eventually be revolutionary. For example, when Nicolaus Copernicus first introduced his heliocentric system, it was not well received. In fact, initially, it did a worse job at predicting the movements of the planets than the existing Earth-centric Ptolemaic system. That was because the Ptolemaic system had been refined for 1400 years and it had been finely tuned to account for all of the perturbations in the night sky.
Today Toyota's Kaizen method is vastly superior to Tesla's Dreadnaught. The modern car manufacturing process is a big improvement over the assembly line that Ford used, but it is an evolution of that same 100-year-old method. The question is, once refined, will Dreadnaught be the system that replaces it.
The modern assembly line was designed around people operating it. Robots have replaced many of the people on the line, but the robots are retrofitted into a system made for people. Dreadnaught, on the other hand, is a system that is designed around robots. This is not all that different from the clean slate design of Tesla's cars. They are not gas cars retrofitted with batteries and motors. They were designed from the beginning to be electric.
Dreadnaught could be the system that allows manufacturing to make a leap forward, or it could be an expensive failed experiment. Time will tell.
* Moats: None yet, but maybe Dreadnaught 3.0 will make the manufacturing world take notice.
Summary
Tesla has looked at all the objections that someone may have to not buying an electric car and they have done their best to resolve them. They have made EVs that are cool, fast, & fun. They have made road trips possible. They have made home and destination charging convenient. They are working on battery and vehicle manufacturing to increase the volume and bring down the cost. They have allowed you to "drive on sunshine". Tesla has created a compelling narrative that is far beyond just the vehicles they sell.
In the process of resolving all of these objections, Tesla has created a long list of moats. Tesla's moats are not unbreachable, but some of them are so far outside of the culture of the traditional automakers or beyond the template that the investors impose upon them. Even the automakers that are making EVs are trying to compete with the car's features or price. They don't even know how to compete with the Tesla narrative. It seems Tesla will stand apart from the crowd for many years, even after the legacy automakers become fully committed to electric cars.
Disclosure: I'm long Tesla
http://ts.la/patrick7819
